processing system and achieving economies of Why We Did This Audit scale. The specific cost savings depends on The OIG conducted this audit to assess the the actual consolidation strategy VA selects accuracy of payments made for and on how well VA implements the chosen pre-authorized inpatient fee service and assess strategy. As a result, we have conservatively the efficiency of processing fee service claims. used the lowest projection to estimate cost savings of $26.8 million in FY 2009 and to What We Found estimate cost savings of $134 million over the VA Medical Centers (VAMCs) improperly next 5 years. paid 28 percent of inpatient fee claims during What We Recommended the 6-month period of January 1, 2009 through June 30, 2009. The improper payments We recommended the Under Secretary for occurred because VHA’s policies for Health establish guidance on how to determine determining eligibility for inpatient fee care eligibility, reduce improper payments, and did not provide adequate guidance on how to improve claims processing efficiencies for determine eligibility for inpatient fee care or inpatient fee care. were not understood by fee staff. Other Agency Comments payment errors occurred because fee staff did not have accurate and timely information to The Under Secretary for Health has agreed to determine correct payments, and the VAMC address all of our audit recommendations and did not have sufficient controls to detect concurs with our estimate of questioned costs clerical errors. in net overpayments and that there are cost We estimate that VHA made net savings associated with consolidating the Fee overpayments of $120 million on inpatient Program’s claim processing system. The care for veterans in FY 2009 or $600 million Under Secretary plans to establish guidance in improper payments over the next 5 years. and mandate training for VHA staff, develop For each of our sample items, we found an audit tool to reduce improper payments, sufficient VAMC medical documentation to initiate recovery of overpayments and convince us that the veteran received the reimbursement of underpayments identified in services paid for by VHA. Efforts are needed this audit, and develop a pilot program to to reduce the cost associated with processing improve payment processing efficiencies. We claims and the time it takes to process claims will monitor the implementation of these by improving processing efficiencies. planned actions. Inefficiencies occurred because of the Fee Program’s decentralized structure and its (original signed by:) labor-intensive payment system. BELINDA J. FINN VHA and OIG agree there will be general cost Assistant Inspector General savings and efficiencies realized with for Audits and Evaluationsconsolidating the Fee Program’s claim i TABLE OF CONTENTS Introduction ......................................................................................................................................1 Results and Recommendations ........................................................................................................3 Finding 1 VHA Needs To Improve the Accuracy of Pre-Authorized Inpatient Fee Payments .............................................................................................................3 Finding 2 prove Claims Processing Efficiency ...................................12 Appendix A Background ...................................................................................................... 19 Appendix B Scope and Methodology ................................................................................... 21 Appendix C Statistical Sampling Methodology ⎯Claims Payments ................................... 23 Appendix D amp ⎯Efficiency .............................................. 26 Appendix E Monetary Benefits in Accordance with IG Act Amendments ......................... 28 Appendix F Agency Comments ........................................................................................... 29 Appendix G OIG Contact and Staff Acknowledgments ....................................................... 36 Appendix H Report Distribution .......................................................................................... 37

ii Audit of Non-VA Inpatient Fee Care Program INTRODUCTION Objective This audit assessed the accuracy of payments made for pre-authorized inpatient fee service and assessed the efficiency of processing fee service claims. Description of the The purpose of the Non-VA Fee Care Program is to assist veterans who Fee Program cannot easily receive care at a VAMC. The Program pays the medical care costs of eligible veterans who receive care from non-VA providers when the VAMCs are unable to provide specific treatments or provide treatment economically because of their geographical inaccessibility. Fee care may include dental services, outpatient care, inpatient care, emergency care, and medical transportation. Pre-authorized inpatient services consist of non-emergency and emergency care. Program VHA’s Chief Business Office (CBO) is aligned under the Deputy Under Management Secretary for Health for Operations and Management and is responsible for the management of the Non-VA Fee Care Program. Although Veterans Integrated Service Networks (VISNs) have operational authority and responsibility for their Fee Programs, most VAMCs independently administer the Fee Program for their areas. Program Costs Total annual fee payments for the Non-VA Fee Care Program have grown from about $1.6 billion in FY 2005 to about $3.8 billion in FY 2009. Inpatient Fee Program expenditures have increased 126 percent over the past 4 years from about $461 million in FY 2005 to $1 billion in FY 2009. During this period, pre-authorized inpatient fee costs increased 142 percent from about $306 million in FY 2005 to $740 million in FY 2009. The number of patient discharges has also increased 82 percent from 35,085 in FY 2005 to 63,713 discharges in FY 2009. Recent OIG Audit The OIG issued Audit of Veterans Health Administration’s Non-VA Outpatient Fee Care Program (Report No. 08-02901-185, August 3, 2009). The audit concluded that VHA needed to strengthen controls over outpatient fee care and make regulatory changes to address outpatient facility charges. The audit found that VHA improperly paid 37 percent of outpatient fee claims by making duplicate payments, paying incorrect rates, and making other less frequent payment errors. As a result, VHA overpaid $225 million and underpaid $52 million to fee providers in FY 2008, or about $1.1 billion in overpayments and $260 million in underpayments over the next 5 years. That audit, the first in a series of audits to review VHA’s Non-VA Fee Care Program, provided substantial evidence that the Fee Program is a high-risk program with insufficient controls. VA Office of Inspector General 1 Audit of Non-VA Inpatient Fee Care Program To understand the current fee system in detail, the CBO initiated the Indiana VHA’s Evaluation 1of Current Claims University/Purdue University Fee Service Evaluation Project , which was Processing published in February 2010. The project’s purpose was to benchmark best System practices within thirteen VHA claims processing sites; collect in-depth process performance information; and evaluate overall efficiency, operations management, and cost metrics. One of the study’s major findings was that consolidated claim processing sites’ cost to process claims was lower than non-consolidated sites’ cost to process claims. The study attributed consolidated sites lower processing costs to economies of scale with a larger, more experienced staff processing a high volume of claims. The direct fee staff cost per claim ranged from a high of $29 at a non-consolidated site to a low of $4 at a consolidated site. Therefore, the study concluded that site consolidation was a prime target for improving process efficiency within non-VA-care. Although the study’s cost analysis used different review methodologies than we used in this audit, it closely supported the reasonableness of our audit cost estimates and the opportunity to improve current economies of scale through consolidation of fee payment processing and achieve better use of funds.

1 Veterans Integrated Service Network 11 VA Center for Applied Systems Engineering, Fee Process Evaluation, February 5, 2010 VA Office of Inspector General 2 Audit of Non-VA Inpatient Fee Care Program RESULTS AND RECOMMENDATIONS Finding 1 VHA Needs To Improve the Accuracy of Pre-Authorized Inpatient Fee Payments 2 The audit found that VAMCs improperly paid 28 percent of pre-authorized inpatient fee claims. VAMC staff did not properly authorize inpatient fee care because VHA policies did not provide adequate guidance on how to determine eligibility or fee staff did not understand them. In addition, other payment errors occurred because fee staff did not have accurate and timely information to determine correct payments, and the VAMC did not have sufficient controls to detect clerical errors. As a result, we estimate that VHA made improper payments resulting in net overpayments of 3$120 million in FY 2009 or $600 million over the next 5 years. VHA Needs To For the 6-month period of January 1, 2009–June 30, 2009, we estimate that Improve Eligibility VAMCs improperly paid 13 percent of all inpatient claims by authorizing Determination for non-emergency and emergency inpatient fee care for veterans ineligible for Inpatient Fee Care this care. These veterans were enrolled in the VA health care system and were eligible for other VA health care, such as outpatient services. VAMC fee staff authorized non-emergency inpatient fee care for veterans ineligible for this care because VHA policy did not adequately address how fee staff should determine eligibility. In addition, VAMC fee staff authorized emergency inpatient fee care for veterans ineligible for this care because fee staff did not understand the eligibility criteria. As a result, we estimate that VHA improperly authorized a total of $106.6 million for pre-authorized non-emergency and emergency inpatient care in FY 2009 or $533 million over the next 5 years. VHA Eligibility We estimate that VAMCs improperly paid 9 percent of all inpatient fee Policy Inadequate claims by authorizing non-emergency inpatient fee care for veterans who were not eligible for this care. These errors occurred because VHA’s policy did not adequately address how to determine eligibility for non-emergency inpatient fee care. As a result, we estimate that VAMCs overpaid $91.4 million in FY 2009.

2 The combined error rate for authorization and improper payment errors was 30 percent (13 percent plus 17 percent). To prevent double counting in calculating the overall estimated error rate, we only counted each claim once, regardless of whether the claim contained one or multiple errors. 3 Although we found both underpayments and overpayments, we combined them into one net estimated amount because underpayments were too infrequent to estimate a separate total underpayment amount with reasonable precision. VA Office of Inspector General 3 Audit of Non-VA Inpatient Fee Care Program Title 38 of the United States Code (USC) §1703 establishes clinical access criteria and individual eligibility criteria for non-emergency fee care. VHA must ensure that both criteria are met before authorizing inpatient care. Clinical Access Criteria—The statute authorizes the use of fee care only if VHA: (1) does not have the clinical capability, (2) does not have capacity, or (3) facilities are geographically inaccessible for the veteran. Individual Eligibility Criteria—Once the clinical access criteria is met, a VAMC must determine whether the veteran is eligible based on individual eligibility criteria, such as treatment of service-connected conditions or referral from a VA facility for an emergency condition the VA cannot treat. (See Appendix A for additional individual eligibility criteria.) VHA policy governing inpatient fee care eligibility, VHA Manual M-1, Part I, Chapter 21 dated January 12, 1995, does not clearly state that both clinical access and veteran eligibility criteria must be met to approve non-emergency inpatient fee care. Instead, it only states that the care must meet clinical access criteria and be authorized in advance. Although VAMC fee staff understood the clinical access criteria, they incorrectly believed all properly enrolled veterans were eligible for non-emergency inpatient care. The following example illustrates this type of error. A VAMC pre-authorized knee surgery, which met the clinical access criteria, for a non service-connected veteran. According to the Chief of Surgery at the VAMC, the VAMC authorized this non-emergency procedure to reduce their orthopedic surgery waitlist. However, the VAMC fee staff did not review the veteran’s individual eligibility before or after the Chief of Surgery authorized the procedure. Although evidence supports that services were provided, the veteran did not meet the individual eligibility criteria, and the VAMC improperly paid the fee provider $12,343. Thus, VHA lacks assurance that payments made without proper eligibility review effectively meet the requirements prescribed in Title 38 USC §1703 and that budgetary resources are used as intended. VAMCs Incorrectly We estimate that VAMCs improperly paid 4 percent of all inpatient fee Determined claims by authorizing emergency care for veterans who were ineligible for Eligibility for this care. These errors occurred because fee staff did not understand the Inpatient individual eligibility criteria for emergency inpatient fee care, such as the Emergency Care authorized treatment must be related to a service-connected disability. As a result, we estimate that VAMCs overpaid $15.2 million for emergency fee care in FY 2009. VA may authorize payment for an eligible veteran’s emergency care if the treatment is of such a nature that a delay would be hazardous to life or VA Office of Inspector General 4 Audit of Non-VA Inpatient Fee Care Program health. Unlike non-emergency care, a VA clinician does not authorize emergency care in advance. However, the veteran must meet the same individual eligibility criteria as required for non-emergency care in Title 38 USC §1703, and the VA must be notified within 72 hours of the veteran’s admission to the non-VA facility. Although the CBO has issued procedure guides on determining emergency inpatient eligibility, fee staff did not properly apply the guidance because they did not understand the individual eligibility criteria for emergency inpatient fee care. The following example illustrates this type of error. A non-VA facility provided emergency cardiac care to a veteran with a 10 percent service-connected disability for scar tissue and notified the VAMC within 72 hours of the veteran’s admission. The VAMC clinical staff correctly determined that the emergency care met the clinical access criteria. However, to meet individual eligibility criteria for inpatient care, the treatment must be for a service-connected disability. The veteran was ineligible for emergency inpatient care because his cardiac care was not related to his service-connected disability. While there was evidence that the services were provided, the VAMC improperly paid the fee provider $9,133.

We understand VHA’s commitment to provide timely and quality inpatient care to eligible veterans. However, when VHA does not have the capability to provide the necessary care, then VHA is obligated to provide fee care within current regulatory authority. Without an adequate VHA policy for determining eligibility of non-emergency inpatient fee care, and adequate training for determining eligibility of emergency inpatient fee care, VAMCs will continue to authorize fee care for ineligible veterans. VHA will also continue to lack assurance that it appropriately uses resources. More importantly, VHA cannot ensure that some veterans will have access to care that other veterans do not because of VHA’s inconsistent application of eligibility criteria in authorizing inpatient fee care. VHA Needs To For the 6-month period of January 1, 2009–June 30, 2009, we estimate that Reduce Fee Care VAMCs paid improper amounts for 17 percent of pre-authorized inpatient Payment Errors fee claims. VAMCs made three types of payment errors, they did not: (1) know where to find inpatient transfer information needed to determine when to apply per diem payment methodology, (2) utilize Preferred Pricing Program rates because the Program process was not timely, and (3) pay other proper rates because fee staff were provided with inaccurate rate information or made clerical errors. As a result, we estimate that VHA made net overpayments of $13.3 million in FY 2009 or $66.5 million over the next 5 years. VA Office of Inspector General 5 Audit of Non-VA Inpatient Fee Care Program Table 1 below summarizes improper payment errors by type. Table 1. VHA Improper Fee Care Payment Errors by Type Rate of Estimated FY 2009 Type of Error Error Payment ErrorsPer Diem Payments Not Made 2% $3.0 millionPreferred Pricing Program Rates Not 4% $5.6 million Used Other Payment Errors 11% $4.7 millionTotal Payment Errors 17% $13.3 millionSource: OIG analysis of inpatient fee care payments. Proper Per Diem We estimate that VAMCs improperly paid 2 percent of all inpatient fee Payments Not claims by not applying the per diem payment methodology. These errors Made occurred because fee staff were not aware that inpatient transfer information needed to determine when to apply the per diem payment methodology was available in the veteran’s electronic health record. As a result, we estimate that in FY 2009 VAMCs made net overpayments of $3 million. Title 38 CFR §17.55 provides authority for VA to use the Centers for Medicare & Medicaid Services’ (CMS) Diagnosis Related Group (DRG) based prospective payment system for those hospitals that accept Medicare. The DRG rate consists of a CMS predetermined payment rate and the average length of stay. The hospital does not receive more than the DRG payment if the inpatient care exceeds the average length of stay. To determine when to use the per diem payment methodology, fee staff must know whether the veteran was discharged home or transferred to another facility. If the non-VA hospital discharges a veteran, VA pays the DRG amount. If the non-VA hospital transfers the veteran to a VAMC, VA pays a portion of the DRG amount, commonly referred to as a per diem payment. VA calculates per diem payments by dividing the DRG rate by the average length of stay. The resulting per diem rate is multiplied by the number of days the veteran was hospitalized to arrive at the per diem payment. Although invoices included discharge and transfer information, fee staff normally confirmed the accuracy of the information. This practice proved appropriate because we found several instances of inaccurate invoice information. Fee staff at the sites we visited used various sources to confirm a veteran’s discharge or transfer, such as addendums to existing medical notes, e-mail notes, and utilization review notes. However, many fee staff were unaware that the veteran’s electronic health record had an Admission/Discharge Clinical Report that contained information on when a veteran was admitted as an inpatient to a VAMC. As a result of not utilizing this information, fee staff did not correctly apply the per diem payment VA Office of Inspector General 6